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A service that automatically switches suppliers and a cap on charges for long-standing customers should be central to the competition watchdog’s investigation into the so-called “loyalty penalty”, a charity has urged.

The problem, which according to the consumer rights charity Citizens Advice costs the average consumer £900 a year, is rife even in areas where people can easily move between providers, such as insurance or broadband.

A customer who comes to the end of a fixed-term deal or annual policy could find themselves moved to a much higher rate if they do not shop around for a better offer.

The Competition & Markets Authority (CMA) said it would look into this after Citizens Advice launched a “super-complaint”.

Nick Munday, 61, from South Yorkshire, found his annual home insurance premium had risen from £590 to £1,989 in the 21 years he had been with Santander.

After reading about the super-complaint he was able to find cover with another provider for less than £500. After he complained, Santander offered a premium of £750.

He said: “Companies should not be consciously ripping off people who are loyal to them. Maybe I was naive and should have switched every year but busy people can’t always do that – once you have done your gas, electricity, insurance and everything else you won’t have any time left.”

Santander said the new price was not like-for-like and the premium had been affected by a claim in 2014, later withdrawn.

A spokesman said: “Santander is constantly working to ensure that our prices are fair and competitive. We will continue to do this and the Citizens Advice super-complaint will be a key consideration for us.”

Martyn James of Resolver, a consumer rights group, said rules required firms to treat customers fairly. He added: “If you can show that you have been disadvantaged because of factors outside your control, you could ask for your money back. It could be a huge mis-selling scandal.”

How can it be fixed?

She added: “The CMA need to take our super-complaint seriously and commit to tackling it properly through a market study. Bold changes are needed to stop loyal customers from getting ripped off.”

Aviva has this week announced it will respond to the supercomplaint by launching “Aviva Plus” which is available for home and car insurance, and will not take loyalty into account when calculating renewal premiums.

But it is only available for 10pc of the insurer’s customers meaning those who are not eligible, or do not sign up, will not benefit next year. Aviva said it had spent 18 months developing a new product to address its customers concerns about the market. The company will waive its cancellation fees for existing customers who choose to switch.

Rather than calling for specific solutions, Citizens Advice is urging the CMA to come up with the solutions through a market study. But Ms Guy shared three points the charity feels should be central to the investigation with Telegraph Money.

A cap on price difference

The first solution Citizens Advice says that the Competition and Markets Authority should address is a cap on how much more loyal customers can be charged compared to new customers.

This would mean firms could still offer cheap introductory rates, but would control how much more loyal customers could be charged.

But James Daley, of consumer champions Fairer Finance, warned against price caps. He added: “I think that’s a step too far. Interfering in markets tends to have unintended consequences.”

Regulatory requirement to treat all customers fairly

Requiring insurers to treat all customers fairly when deciding price could help remove the issue. Companies would still be able to increase renewal prices based on things like claims or changing circumstances, but loyalty would no longer be an issue.

Mr James pointed out that these protections do already exist, but said: “The rules around treating customers fairly need to be much more clearly defined, and that includes financially disadvantaging someone for being loyal.”

Automatic or collective switching

Automatic switching services are becoming more popular in the energy market. Services such as The Labrador or Look After My Bills, which recently achieved success on the BBC show Dragons’ Den, move customers between energy suppliers whenever they can make a saving, without them needing to lift a finger.

Apps like Multiply are looking to extend this to other industries like pensions and insurance, while Gocompare is thought to be developing a similar service.

This could be a powerful tool in fixing the underlying problem, but experts point out it does not address the underlying issue.